10 Stocks for 2013 - #6 - Lululemon

Dave is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

At Fastball Financial, we've compiled a portfolio of 10 Stocks for 2013 to provide a portfolio of great stocks for:

  1. Diversification across industries and market caps
  2. Growth in some of the hottest themes and industries
  3. Sufficient stability and dividends to offset potential market losses

Thus far, we've named Intuitive Surgical, Apple, F5 Networks, Starbucks and Chipotle to this portfolio.  For our 6th stock, we're adding yet another company that relies upon a strong consumer: Lululemon Athletica (NASDAQ: LULU).  This yoga-inspired clothing company has had a tremendous run over the past few years.  The chart below shows Lululemon's rapid accent from < $2 back in 2009, up to just under $70 currently.

<img src="http://media.ycharts.com/charts/1eda6278aeabe699a5a63aa8f9a9412a.png" />

Growth

Lululemon has done nothing but grow, grow, and grow some more.  Whether it's revenue, EPS, store count, or on-line sales, the name of their game has been growth.  Lululemon's clothing is expensive, but that hasn't stopped its customers from buying more and more.  It has a tremendous following of loyal customers who keep coming back for more because the clothing is so good.

Value

Currently, Lululemon has a Price-to-Earnings-to-Growth (PEG) ratio near 1 when compared to its long-term growth rate.  That's great value for such a consistently high-growth company.  What's more, Lululemon is nowhere near saturation.  They have plenty of room to open up more stores all across U.S. and Canada.  And if their store growth isn't enough, consider that their on-line sales have been a significant part of their growth and should continue to be going forward.

Opportunity

It's always important to wait for pullbacks when buying high-growth companies so you can better ensure that you don't get caught chasing a stock higher right before it drops.  Good news!  We just got such a pullback in Lululemon.  On Monday, Lululemon pre-announced results for their 4th quarter ending January 2013.  They guided to the high-end of their forecasted revenue range of $475-480 million and above their forecasted earnings range of $0.71 - 0.73 with a $0.74 estimate. 

So why did the stock drop?  It's all about expectations.  Analyst consensus estimates were higher than Lululemon's guidance.  Also, some (who didn't pay attention to the company's initial guidance) may have viewed this as bringing down their estimates or somehow warning about a shortfall.  Quite the opposite occurred.  Management simply confirmed that their results would be at the high-end (or better) of what they told everyone in the first place. 

As a result, we got the pullback we needed.  This doesn't bode well for us having Lululemon in our 10 Stock Portfolio for 2013 since it's off to a rough start.  But for all those patient investors who were waiting for a better price, it's excellent news!

Alternates: Diageo, Disney & Mattel

Worried about whether or not Lululemon can keep up its growth rate?  Let's look at some alternates.  These well-know, established companies are among some of our favorites.

Diageo (NYSE: DEO) produces a ton of well-known alcohol brands: Smirnoff, Captain Morgan, Johnny Walker, Crown Royal, Jose Cuervo, Tanquerey, Guinness and Baileys, just to name a few.  It's earnings and revenue growth has been consistent.  With such great brands and consistent sales and operations, it's clear that this company is doing well.  The past couple years has been very kind to Diageo investors.  The stock has sold off over the past month, giving investors an opportunity to pick-up Diageo now with a 3% dividend yield.

<img src="http://media.ycharts.com/charts/aac79d1a6b8ef0173f36ad97d540c677.png" />

Disney (NYSE: DIS) no longer relies on Mickey and Minnie, and many people don't realize that Disney has such a wide array of entertainment properties.  From the theme parks that everyone knows to ABC/ESPN to cruise lines to cartoons & movies, Disney covers a lot of ground to keep people entertained.  They continue to purchase properties such as Star Wars that can produce long-term growth, especially when they integrate them into the properties that they already operate, especially the theme parks and subsequent Star Wars movies that will be produced in a few years.

The chart below shows Disney's revenue growth over the past few years.  Disney provides a steadiness and predictability that investors should appreciate.  The stock hasn't done too well over the past few months, giving investors pause and a chance to get in on a great company, one that's paying out a 1.5% dividend while you wait.

<img src="http://media.ycharts.com/charts/f88ebdf3f90f0980fb542be36ad2d05e.png" />

Lastly, Mattel (NASDAQ: MAT) has many of the brands we all know well, from the older brands such as Barbie, Fisher Price and Uno, to the newer brands such as Monster High, American Girl and CARS.  Mattel has recently been recording record profits and expects similar organic growth going forward, especially as they continue to expand internationally, particularly in China and India.  While its Fisher Price products continue to struggle a bit, its American Girl property in particular is on fire.  Mattel has plenty of growth drivers.  As long as its major source of revenue, Fisher Price, can hang in there, then Mattel should continue to have stellar results.

Mattel has a solid balances sheet and good operating cash flow to support their high 3.3% dividend yield.  This stock hasn't provided too many big pullbacks for buying opportunities, but if you get one it'll be a good time to buy, provided of course that the economy isn't completely tanking.

<img src="http://media.ycharts.com/charts/33120b069fd0719a2562376ed3bef462.png" />

Bottom Line

All of the consumer-related companies mentioned above (Lululemon, Diageo, Disney and Mattel) have generated great growth in both revenue and earnings.  All but Lululemon also offer nice dividends to provide extra income.  But Lululemon is my favorite of this high-quality group because of their huge growth potential over an extended period of time.  All of these companies are great opportunities on buy-backs, but only one can make the 10 Stock Portfolio for 2013, and this year it is Lululemon.


Zaegs has no position in any stocks mentioned. The Motley Fool recommends Diageo plc (ADR), Lululemon Athletica, Mattel, and Walt Disney. The Motley Fool owns shares of Mattel and Walt Disney. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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